5/12 The Shoe is on the Wrong Foot

Written on May, 12 2010 Cheers! I like the UK. Hung Parliament means government will spend far less on useless waste, they are at the extreme of what the public will allow in deficit and will improve and the Pound is pretty cheap. Our friends here just paid couple of billion for Harrod’s. Olympics in 2012. Not too sexy but the old gal may be sturdy. I also like Dubai which had prices drop 50% for real estate. It is an island of profligate spending in a conservative world and “these guys” will start snatching it up as soon as the last shoe falls from Dubai World. I just enjoyed a roundtable discussion regarding Asian economic growth by no less than a brilliant New Zealander. The gentleman delivering the paper has forgotten more about international economics than I will ever know. · Ten years at the University of Cambridge; · Seventeen years at the OECD; · Fourteen years at Lehman Brothers….OUCH Since I don’t have to forget as much as he does (to be as mediocre as I am), I asked a stupid question about China. “If the Chinese stay pegged to the dollar, and the dollar continues to rally as the EURO erodes…the Yuan appreciates toward Europe-Export led GDP growth slows. “If they slow the part of their economy that has currently been working-investments…housing market implosion chapter 3-Investment led GDP slows “If they cannot grow because of the above…and they cannot de-link to the dollar because they know the US will devalue so fast it would make their heads spin… Please explain one more time your findings on why China will grow at 10%? Man he was smart. He explained in small words for me the Impossible Trinity of Free Capital Flow, Fixed Exchange Rates and Independent Monetary Policy, which was very interesting but I thought was the point I was making…then about the time I heard something similar to “on the other hand” I looked out the window. Like all investment banks they had a really nice view. I should think that the biggest winner of a strong EURO/ weak dollar over the last decade was clearly China. They made a bet that tying to the dollar would guarantee that the US could not devalue against the Yuan and it would serve their export growth handsomely. Now the shoe is on the wrong foot. The EUR is destabilizing and the dollar is strengthening rapidly. This will be a double whammy to the Chinese economy. Find some yield that is solid and buy it, Leon